Trustees: death, incapacity and investments

It is common for investments and other financial products to be written in trust, particularly life insurance and investment bonds. The trust will usually be set up at the time the investment is made and further thought might not be given to it until an event occurs such as the death of a life insured. What happens though if one of the trustees wishes to retire from the trust, dies or becomes incapable, before that event occurs?

If the trustee wishes to retire

If the trustee no longer wants to act then they can retire if there will be two remaining trustees or a trust corporation in place, and if the remaining trustees agree. The retirement should be evidenced by a deed partly because this will then vest most of the trust assets in the continuing trustees. According to the Society of Trust and Estate Practitioners some assets such as insurance based investments do not vest automatically in the continuing trustees even if the retirement is by deed. In those cases a separate deed of assignment of assets might be required.

If there will be fewer than two trustees (or a trust corporation) remaining then a new trustee should be appointed. This can be included in the same deed as the retirement. The trust deed should be checked to see if anyone is given the power to appoint new trustees, in which case that person (the appointor) must be a party to the deed to appoint the new trustees. If there is no appointor the Trustee Act provides that the continuing trustees can appoint the new trustee.

If a trustee dies

This is a similar situation to a trustee retiring in the sense that if fewer than two trustees remain either the appointor (if there is one) or the continuing trustees should appoint a replacement trustee by deed.

In some cases no action might be taken on the death of a trustee then, when another trustee death occurs, it is discovered that there are no longer any living trustees. In those circumstances, the executors of the last surviving trustee will have the power under the Trustee Act to appoint replacement trustees.

If a trustee becomes incapable

Incapacity is becoming more common with increasing life spans and so this problem is encountered more often. If there is no doubt as to the trustee’s incapacity (and it might be necessary to obtain a medical report to confirm this) anyone given the power to remove trustees by the trust deed can exercise this power to remove the incapable trustee. If there is no-one with such a power, the Trustee Act then provides that the continuing trustees can replace the incapable trustee. It should be noted that they must be replaced not just retired.

If, however, the incapable trustee has an interest in the trust fund then it will be necessary for the Court of Protection to consent to the replacement of the trustee. Medical evidence will be essential to support this application. A vesting order might also be required to transfer any assets not automatically vested in the new trustees.

If the only trustee remaining is incapable then it may be possible for the trust beneficiaries to give a direction to the incapable trustee’s attorney or deputy directing them to appoint a replacement. For this to be possible the beneficiaries must all be over eighteen, have capacity and together be absolutely entitled to the trust fund. If the trust provides, for example, that A has the income for life with remainder to B and C, then provided A, B and C are all over eighteen and have mental capacity they will be entitled to give a direction.

If no other option is available it will be necessary to make a court application to replace the incapable trustee.

Top tips on replacing trustees

• There should be at least two trustees at any one time, especially as trust deeds often provide that some powers can only be exercised if there are at least two trustees.
• Take action to replace retired or deceased trustees as soon as possible. The longer it is left, potentially the harder it gets.
• If a couple are taking out an investment or insurance policy written in trust, consider appointing a third younger trustee so that there is someone in place as the couple get older.
• Check the trust deed to see if anyone has the power to appoint and/or remove trustees before taking any action to replace a trustee or appoint a new trustee.
• Appointments and retirements should be by deed to ensure automatic vesting of most trust assets.
• To avoid the problems set out above consider appointing a trust corporation to act as trustee as it will not die or become incapable.